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Could the UK Green Investment Bank become a victim of its own success?

In 2008, with the passing of the Climate Change Act, the UK government set the target of reducing CO2 emissions by 80% of the 1990 baseline by 2050. The setting of this target, coupled with targets set at the European level, furthered the need for new, innovative approaches to the reduction of CO2 emissions that would contribute to the mitigation of climate change. One such approach, suggested first in the last Labour budget before their election defeat in 2010, was the establishment of a Green Investment Bank (GIB) for the UK.

The idea of a government-owned but independent GIB was taken on by the succeeding Conservative-Liberal Democrat Coalition government. The GIB’s purpose was to promote private investment in environmentally-beneficial sectors that currently lacked private support. Whilst there was some wrangling over the level of funding the GIB would receive, it finally received £3.8 billion in government funding when it entered its first year of operation on April 1st 2012.

With the Bank going into its third financial year, now serves as an interesting time to assess the progress the GIB has made, as well as to note some of its more limiting factors. It is important to establish whether a bank of this kind really can help in the abatement of climate change and, if so, explore what benefits this approaches has had and what lessons can be drawn from the UK’s experience.

Quick results

Even before the GIB’s establishment private investors had signalled their desire to see such a bank setup. In a letter to David Cameron investors started that they believed it “could play an important role to enable and accelerate… low carbon investment.” Indeed, the Bank has been quick to mobilise private investment. In its second year of financial operations (2013-2014) the GIB was able to mobilise £3 of additional private capital for every £1 it had invested. The level of direct investment by the GIB, in its two full years of financial operations, stood at £1.3 billion which has mobilised up to £4.8 billion in total. The financial projections for the future also seem promising; with the GIB predicting at least an 8% return on its investments after building is completed.

The GIB has made a variation of multimillion-pound investment choices, many of which have garnered media attention. This month alone the GIB has invested £64m in an energy-from-waste plant, partnered with Japan’s Marubeni Corporation to refinance a 50% share in a 210MW offshore wind project, and worked with the Treasury and another private investor to invest in a £74m biomass plant in Scotland. The GIB has become, in a short space of time, the UK’s most active investor in the green economy.

However, it is not the sheer quantity of investment alone on which the GIB’s progress can be judged. It is on its environmental credentials that it should truly be assessed. According to the latest financial report the GIB has published, the Bank has, to date, reduced greenhouse gas (GHG) emissions by some 2,580,000 tonnes. In the estimated remaining lifetime of current GIB projects it is predicted that GHG emissions will be reduced by a further 59,030,000 tonnes (the equivalent CO2 usage of around 2.8m homes in the UK). The figure for the 1990 baseline (which the 2008 Climate Change Act’s 80% CO2 reduction by 2050 pledge is set against) for CO2 emissions was 591,000,000 tonnes; the total figure for GHGs stood at 770,000,000. Clearly then, the GIB, along with private investors, is already making significant headway in the reduction of GHG emissions in the UK, already at least partly responsible for more than 1 out of every 9 tonnes of CO­­2 emissions that were reduced in the UK in the last year.

Criticisms

The GIB has been subject to some criticism, however. In particular, the choice to loan £100m to Drax in order to fund the company’s partial switch from coal to biomass led to protests outside the Bank’s 2013 annual meeting. The environmental benefit of biomass has been called into disrepute and the sustainability of Drax’s biomass sourcing was called into question after this deal was announced (a claim the GIB and Drax strongly refuted), but it was the fact that the loan would also mean that the life of Drax’s coal-fired facilities would be extended that caused the most controversy. This case will no doubt serve to remind the Bank of the scale of the responsibility that has been placed on it to invest in an environmentally responsibly, fully-considered manner. It is therefore no surprise that the GIB has not been keen to invest in nuclear power, a source of energy that former government Chief Scientist described as being too controversial to gain taxpayer support. Even with reported drops in public support for offshore wind turbines, the power source still outstrips support for nuclear, reflecting the PR sense of this move for the GIB.

Additionally, since the creation of the GIB there have also been concerns over the extent to which it rightfully can be described as a bank rather than simply as a fund, due of its lack of borrowing powers. The GIB was not given borrowing powers because of fears of appearing to raise the deficit. Upon the Bank’s founding it was agreed that the Government would give it borrowing powers once targets for reduced debt levels had been met, which was projected to be around 2015-2016 (which was later amended to 2016-2017). To critics, not allowing the Bank to borrow has been interpreted as an attempt to limit its influence. Certainly, due to the slow returns offered by the investments the GIB makes, it could be proposed that the Bank is limited in its ability to act by the size of the spending pot it was first established with. A recent Environmental Audit Committee report stated that if the GIB is to be successful it will have to be granted full borrowing powers by 2015-16, even if debt targets are not met by then.

An uncertain future

Almost half way into its third financial year, the quality of the GIB as an institution made to tackle climate change and accrue private investment in the process has been amply demonstrated. There can be little doubt that the Bank has great potential in making the green economy all the more vibrant and profitable. However, this optimistic review is tainted by the uncertainty of the Bank’s future. With the extent of the deficit established as a popular assessment of political performance, it seems unlikely that the current government or the next will be overly keen to give the GIB the power to borrow. This risks hindering the Bank’s efficiency in performing the job it has been assigned.

It is from this final point that a lesson can be taken for wider application of climate finance initiatives should they pursued to meet European and national targets. If a comparable bank is to set up, it should have longevity of capital rather than a one-off fund given at its launch. This would allay fears amongst potential private investors about the future profitability of the field and ensure that environmental gains can be held and built upon. By not having this certainty the GIB could become a victim of its own success, the more investment it makes in the pursuit of its environmental goals, the closer it may be to no longer having the funds needed to continue operating. Added to this, as it makes more investments and its influence grows, so will the perceived cost of letting the Bank borrow, giving further cause for deficit-fearing politicians to avoid giving the GIB the powers it greatly needs in order to succeed.



57 Responses to Could the UK Green Investment Bank become a victim of its own success?

  1. I think the GIB’s “lack of borrowing powers” should be seen as a strength rather than a weakness. The lessons of the financial crisis of 2007 and 2008 should not be forgotten, when large financial institutions lent huge sums of money to other financial institutions.

    A bank such as Northern Rock in the UK was involved in borrowing in this way, which led to its collapse – later being bailed out by the tax payer – when it no longer had the means to repay its loans. If the GIB were allowed to speculate in a similar way, then it would loose its focus as a “Green Investment Bank”, and become just another merchant bank investing in industries that rely on fossil fuels.

    If we want to build a strong renewable energy sector which will help fight climate change, then the GIB must not loose its focus.

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